I put Ben Franklin’s saying to the test.
Not long ago, I wrote a post explaining how someone could take advantage of a credit card introductory offer for a low (or no) interest cash advance, put the money in an ING CD (or some other high-paying, insured savings account), earn interest, and then pay off the credit card balance before the interest jumped up from its introductory rate. I calculated that I could earn about $700 on a $20,000 credit card cash advance.
Well this works both ways. Mike and I have a home equity line of credit, which we used a while back to buy our Howard Mesa property and a few other things. Back when we signed up for it, the interest rate was very low. But today, it’s 7.5%. Not exactly a great deal anymore.
Enter Capital One (for the sixth time in a week). This offer was 0% for purchases and balance transfers for a full year. Best of all, there were no balance transfer fees. According to the offer, I could get up to $30,000 of credit. And the balance transfer option could be applied to a loan.
You might know where this is going.
I did some math. What if I put $25,000 toward the home equity line of credit, thus reducing the balance by that huge amount? Over the course of a year, I’d save $1,875 in interest (that’s simple interest calculation, which is close enough for me). Then, before the credit card interest rates jumped into their double-digits, I’d write a check from the home equity line of credit to Capital One, thus paying off the entire balance before any interest could accrue.
Of course, I would have to make those minimum monthly payments to Capital One. But if I got into a problem with that, I could always use the home equity line of credit to pay that, too. Besides, my payments on the home equity would be reduced — perhaps by the same amount as the Capital One credit card. Wouldn’t that be a kick!
Understand that the net effect of this on my personal debt would be zero — I’m borrowing from Peter to pay Paul (so to speak). I’d just save a bunch of money in interest. And, like Ben Franklin said, a penny saved is a penny earned.
So I applied for the account with the transfer. Let’s see if I get it.
The odd thing is, I’ve been taking advantage of those year-long 0% interest offers for years. I usually have $10,000 to $20,000 floating around in interest-free debt with a credit card company. (I paid the last one off about six months ago, though, and haven’t applied for a new one since.) With all the credit information available to credit card companies these days, they must be able to figure it out. Yet they still offer me free money, I still take it, and I still pay them back in full before they can start the interest clock.
I win, they lose. And they keep coming back for more.
Go figure, huh?